March 15, 2021Share:
On March 11, 2021, President Biden signed the American Rescue Plan Act of 2021 into law. In addition to extensions of enhanced unemployment relief, increased funding for COVID-19 testing and vaccination programs, aid to state and local governments, and assistance to schools to help get students back into classrooms the Act also includes a number of tax provisions.
Please continue to check back for additional and updated guidance. If you have specific questions about how this impacts your business, please reach out to your Wilkins Miller advisor.
Business Tax Provisions
Paid Sick and Family Leave Credits
The Act extends the applicable period to September 30, 2021. It also increases the limit on applicable wages for which the family leave credit can be claimed to $12,000 from $10,000, effective after March 31, 2021. These fully refundable credits against certain payroll taxes compensate employers and self-employed people for coronavirus-related paid sick leave and family and medical leave. Leave now also includes time off to receive a COVID -19 vaccine.
The Act also resets the ten-day per employee limitation on claiming the sick leave credit. The original 2020 provisions limited employers to claiming the credit for a total of ten days’ leave for an employee, and that ten-day period applies from the original start date through March 31, 2021. Under the Act, effective after March 31, 2021, a new ten-day period is available.
For self-employed persons looking to claim the family leave credit, the number of days for which the credit can be claimed is increased to 60 days (from 50 days) under the Act, retroactively effective after December 31, 2020.
Employee Retention Tax Credit
The Act extends the credit through the end of 2021. The employee retention credit was originally enacted in the Coronavirus Aid, Relief, and Economic Security (CARES) Act, and it allows eligible employers to claim a refundable credit for paying qualified wages to employees.
Tax Treatment of COVID-19 Relief
The Act provides that targeted Economic Injury Disaster Loan (EIDL) grants received from the U.S. Small Business Administration (SBA) are not included in gross income and that this exclusion from gross income will not result in a denial of a deduction, reduction of tax attributes, or denial of basis increase. Similar treatment is afforded SBA restaurant revitalization grants. The Consolidated Appropriations Act, 2021 included similar provisions applicable to EIDL grants, grants to entertainment venues, educational grants, etc.
Excess Business Losses of Noncorporate Taxpayers
The limitation on excess business losses is extended one year and applies to tax years beginning after December 31, 2020, and before January 1, 2027.
Individual Tax Provisions
The Act provides a $1,400 stimulus payment to individuals plus $1,400 for each eligible dependent. Like previous stimulus payments, this third round is subject to income limitations. The amount of the payment phases out ratably for single filers with adjusted gross income over $75,000 ($112,500 for heads of households and $150,000 for joint filers). The stimulus amount phases down to $0 for single filers with $80,000 of adjusted gross income ($120,000 for heads of households and $160,000 for joint filers). The Act uses 2019 AGI to determine eligibility unless the taxpayer has already filed a 2020 return.
Unlike the previous stimulus payments, the families should receive stimulus payments for eligible dependents over the age of 17.
You can check the status of your payment using the IRS’s Get My Payment Tool on the IRS’s website.
The Act makes the first $10,200 in unemployment benefits tax-free in 2020 for taxpayers making less than $150,000 per year.
Child Tax Credit – 2021 Only
The Act includes a significant overhaul of the child tax credit, but only for the 2021 tax year.
The Act increases the amount of the credit to $3,000 per child ($3,600 for children under 6) and makes 17-year-olds qualifying children. The increased credit amount phases out for taxpayers with incomes over $150,000 for married taxpayers filing jointly, $112,500 for heads of household, and $75,000 for others, reducing the expanded portion of the credit by $50 for each $1,000 of income over those limits.
The IRS is directed to estimate taxpayers’ child tax credit amounts and pay monthly in advance one-twelfth of the annual estimated amount. Payments will run from July through December 2021.
Taxpayers will have to reconcile the advance payment amount with the actual credit amount on next year’s return and increase taxable income by the excess of the advance payment amount over the actual credit allowed.
Dependent Care Assistance – 2021 Only
The Act makes various changes to the child and dependent care credit, effective for 2021 only, including making it refundable. The credit will be worth 50% of eligible expenses, up to a limit based on income, making the credit worth up to $4,000 for one qualifying individual and up to $8,000 for two or more. Credit reduction will start at household income levels over $125,000. For households with income over $400,000, the credit can be reduced below 20%.
The Act also increases the exclusion for employer-provided dependent care assistance to $10,500 for 2021.
Earned income tax credit – 2021 Only
The Act makes several changes to the earned income tax credit. It introduces special rules for individuals with no children: For 2021, the applicable minimum age is decreased to 19, except for students (24) and qualified former foster youth or homeless youth (18). The maximum age is eliminated.
The credit’s phaseout percentage is increased to 15.3%, and the phaseout amounts are increased. The credit would be allowed for certain separated spouses. The threshold for disqualifying investment income would be raised from $2,200 to $10,000.
Temporarily, taxpayers would be allowed to use their 2019 income instead of 2021 income in figuring the credit amount.
Premium Tax Credits
The Act makes changes to the premium tax credit. For 2021 and 2022, the Act modifies affordability percentages used in calculating the premium tax credit to make credits available for individuals with incomes above 400 percent of the federal poverty line and increases credit amounts for those already qualified. For 2021, the Act makes advance premium tax credits available for individuals receiving unemployment compensation. And the Act eliminates the recapture provisions applicable to 2020 for taxpayers receiving excess premium tax credits.
The Act amends Sec. 108(f) to specify that gross income does not include any amount that would otherwise be included in income due to the discharge of any student loan after Dec. 31, 2020, and before Jan. 1, 2026.
Health and Retirement Benefits
The Act includes several changes meant to help employers meet funding obligations for pension plans. The act temporarily delays the designation of multiemployer pension plans as in endangered, critical, or critical and declining status and makes other changes for multiemployer plans in critical or endangered status.
The Act includes premium assistance for COBRA continuation coverage through September 31, 2021. It calls for a 100% reduction of COBRA premiums for eligible individuals. The assistance is provided by reimbursing the employer (or whoever is to receive the premiums) for unreceived premiums through a credit against Medicare payroll taxes (not OASDI taxes).
The Act excludes the premium reductions from income. It also includes a penalty to be paid by employers failing to provide adequate notice to former employees whose COBRA continuation period has lapsed.
Updated 3/15/21 at 8:30 AM